Infosys May Cut Forecast on U.S. Visa Proposals: Corporate India

Infosys Ltd., India’s second-largest software exporter, may cut its annual sales forecast as concern that proposed U.S. immigration legislation could impose visa restrictions prompts clients to delay outsourcing contracts.

Infosys is expected to forecast sales in dollar terms will increase as much as 7.5 percent in the 12 months ending March 31, from its earlier projection for as much as 10 percent growth, according to the median of 10 analysts in a Bloomberg News survey. The Bangalore-based company will report first-quarter earnings tomorrow.

Billionaire co-founder N.R. Narayana Murthy, who returned as executive chairman last month to help revive growth, said June 15 that sales recovery may be painful and take at least 36 months. The U.S. bill, if approved without revision, would make it harder for outsourcing companies to use temporary worker visas and will be “damaging to the offshore business model,” according to Bloomberg Industries analyst Anurag Rana.

“Fiscal 2014 won’t be a great year for Infosys, with client sentiment toward the industry dimming,” said Urmil Shah, a Mumbai-based analyst at Kim Eng Securities Pvt. “The immigration bill is compounding problems and is really the biggest fear across the industry, but especially for Infosys which is already being surpassed by the competition.”

‘Just Shuts’

Among the various changes in the proposed immigration law that has been passed by the Senate is a measure to restrict companies with a U.S.-based staff comprised of visa holders in excess of 15 percent from placing those employees at domestic client locations. This rule “really just shuts you off from the entire business,” Infosys’s Chief Financial Officer Rajiv Bansal said at the Sanford C. Bernstein Strategic Decisions Conference on May 31.

Infosys gets the bulk of its sales from U.S. companies, with North American customers having accounted for 62.2 percent of revenue in the year ended March. Work done onsite at client locations worldwide accounted for 51 percent of revenue in the last fiscal year, with the remaining 49 percent delivered from offshore, according to data on the company’s website.

Shares of Infosys plunged the most in 10 years in Mumbai trading on April 12 after the company forecast full-year sales growth as slow as half the pace analysts estimated. The stock rose 1.1 percent to 2,528.35 rupees at the close in Mumbai trading, paring its drop since the software provider’s revenue projection missed analysts’ estimates to 13 percent.

Tata Consultancy

Tata Consultancy Services Ltd., India’s largest software exporter, is projected to post full-year revenue growth of 16 percent, the average of 64 estimates compiled by Bloomberg. Infosys’s April forecast of 6 percent to 10 percent increase in annual sales already lags behind the 10 percent to 14 percent growth estimate for Indian software exports given by the industry group Nasscom.

The global economic slowdown has taken its toll on India’s largest software services companies, with third-ranked Wipro Ltd. and Infosys being the slowest to emerge after 2008, said Harit Shah, analyst with Nirmal Bang Equities Ltd. Revenue growth over the last four fiscal years averaged 10 percent at Wipro, and 17 percent at Infosys, lagging behind Tata Consultancy’s 23 percent and HCL Technologies Ltd.’s 29 percent, according to data compiled by Bloomberg.

Rupee Slide

While the rupee has slid to a record low, increasing the value of sales made outside India, Infosys and Tata Consultancy are passing on the currency benefit to clients as they compete for orders.

The rupee traded at 59.765 per dollar as of 4:16 p.m. and has lost about 8 percent this year, according to prices from local banks compiled by Bloomberg.

The projected 7.5 percent sales growth for the current 12 months will be Infosys’s slowest in four years and the lowest among the four competitors, according to data compiled by Bloomberg.

Infosys has been forced to shed its premium pricing in order to compete for global contracts, Kim Eng’s Shah said. This resulted in narrower operating margins, which could reach as low as 23 percent in the quarter ended June, he said.

‘Aggressive’ Pricing

“We are very focused on growth and that is the reason we actually did not give our margin guidance for” the full-year, Infosys’s Bansal said at the conference in May. “So I think short term, focus on growth, even if it means probably going more aggressive on the pricing.”

Infosys will refocus on winning large outsourcing deals and adopt flexible pricing, Murthy told shareholders June 15. The software maker, which aims to narrow Tata Consultancy’s lead, last month announced salary increases of an average 8 percent for employees based in India from July 1 and a similar 8 percent average raise for its global sales force effective May 1.

“There is a clear focus on addressing internal issues” following the return of Murthy, Sandip Agarwal, Omkar Hadkar and Deepansu Jain, analysts at Mumbai-based Edelweiss Securities Ltd., wrote in a June 13 note to investors. “This announcement will have a positive impact on employee morale.”

Infosys’s push to tap demand from U.S. President Barack Obama’s drive to overhaul the nation’s health-care system also helped it win at least one order in the last quarter. The software company’s public services unit last month won a one-year $49.5 million contract from the District of Columbia to develop a health benefit exchange.

Low Expectations

The software exporter is projected to report net income in the three months ended June increased 1.3 percent to 23.2 billion rupees ($388 million), according to the median of 34 analysts estimates compiled by Bloomberg. Sales in the quarter climbed 14 percent to 109.9 billion rupees, analysts estimated.

“Expectations are low for Infosys, because Murthy has basically told us not to expect a good result for six or seven quarters,” said Amar Mourya, an analyst with India Nivesh Securities in Mumbai. “Murthy at the helm is providing a bit of comfort, so we’re not expecting any significant carnage going forward. Investors with long-term patience will be rewarded when the company recovers,” said Mourya, who recommends investors hold the stock.

Before it's here, it's on the Bloomberg Terminal.